The chart:

Shows an index average for SPX , NAS and DOW using rescaled CFD and futures prices.
Indicator is a momentum oscillator (midline) with an envelope much like a Bollinger band .

The paradox:

  • The consensus is the chart is a picture of 'doom' (as bearish as it gets).
  • At the same time, every trader in the chat room was bullish on the upcoming 12 hours. Not a single bear.
  • The assumption that recent outcomes will be repeated is also called "The Hot Hand" .
  • Both chart and traders refer to the same asset class. The chart accurately describes what traders experienced. Same information, but divergent conclusions and sentiment.


Why the gap?

  • One contributing factor is likely the qualitative difference between looking at a chart, and trading that same market in real time.
  • Research shows that when we "experience" outcomes ourselves we pay more attention to the most recent, frequent and impactful outcomes. This does not happen if we get the same information on a chart, from a discussion, or the news.)
    In his book "The Black Swan", Nassim Taleb attributes peoples 'black swan blindness' ( pp .77) to never *experiencing* an event, even if the information is available in some descriptive format (like a chart). There is a similar discussion in the chapter on rare events ( ch .30) in Kahneman's book "Thinking fast. and slow" .
  • Lastly, lab studies from economics, finance and psychology provide data for both predictive and descriptive models. These models can be used to predict how personal experience with risk will result in different sentiment that a simple description of the same information. Some of this research is summarized in a Psych-Science paper at: https://pure.mpg.de/rest/items/item_2504664/component/file_2520409/content


Notes:

This way they can share the same USD scale and
are weighted so that a 1 point change will imply the same change in $ terms. (For weights see: https://www.barchart.com/futures/contrac... ).

In basketball there is a belief that a player can be on a hot-streak and more likely to score. Despite the compelling belief, statistical studies show it to be false. The same can be said for consecutive sessions in the equity markets. On a whole the market is largely efficient thanks to our relentless effort to remove every last inefficiency.
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